Free Money Finance

What Real Millionaires Do

2009-11-20T12:15:00-05:00

I'm done reading my copy of Stop Acting Rich: ...And Start Living Like A Real Millionaire and I'll be posting a bit on it here and there. But for now I wanted to share a general overview of the book's findings regarding what real millionaires do:

Dr. Stanley’s research and the national survey carried out on his behalf by University of Georgia Survey Research Institute rips the lid off just about every assumption we have about who the really rich are (and aren’t), what they do (and don’t do) and what they buy (and don’t buy).

For example:

The #1 most popular make of car among millionaires is Toyota--not BMW or Mercedes
Real millionaires pay about $16 (tip included) for a haircut at a traditional barbershop
Nearly 4 in 10 millionaires surveyed buy wine that costs around $10
There are currently more than 350,000 millionaire educators (working or retired teachers or professors)--a profession that is far better at transforming income into true wealth than doctors or lawyers
Only 5.7 percent of all millionaires surveyed nationally paid $1,000 or more for their most recently acquired suit
Sixty-four percent of all real millionaires have never owned a second house – not even a rustic log cabin in the woods
The proportion of Americans who owned boats in 2006 exceeded the proportion who left an estate of $1 million or more in 2007 by a ratio of nearly 5 to 1
In the U.S., there are nearly three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more
The number one preferred brand of shoes worn by millionaire women is Nine West and their favorite clothing store is Ann Taylor--with the Gap and Costco not far behind
Most real millionaires eschew Rolex, Omega and Tag Heuer timepieces in favor of Seiko watches
Those who give away larger portions of their income to charitable causes end up accumulating more wealth.

Here's how I compare on these measures:

I own a Toyota (as well as a Subaru.)
I cut my own hair, so I'm well below the $16.
I don't drink alcohol, so there's no wine for me.
I'm not a doctor, lawyer, or an educator, bit that's fascinating information.
I've NEVER spent $1,000 for a suit.
I've never owned a second home.
Ha! I don't own a boat.
I'm not a millionaire woman, but I do shop at Costco. Does that count? ;-)
My watch is a Casio, purchased at Walmart, and it works GREAT! (It does a very good job at keeping time during soccer matches.)
Hmmmm -- giving related to wealth accumulation. Who would have ever guessed that? :-)

I hope you enjoy learning about this book as much as I did reading it. It's full of good, basic, wealth-generating tips and I plan on sharing them with you!

Five Steps to Six Figures in Seven Years

2009-11-20T05:29:00-05:00

Here is a piece I originally wrote for Get Rich Slowly. It's only slightly different than the version there (this version has no comments or editting from JD -- though his additions probably made the piece better.) ;-)

Historically, "making six figures" has been to income earners what "becoming a millionaire" has been for those tracking their net worths -- a lofty goal achieved by only a select few. And while neither a six-figure earner nor a millionaire can bask in the luxury they could a couple decades ago, there's no doubt that earning over $100,000 a year still puts you in a select group. In fact, the US Census Bureau says that only 5.63% of individual income earners and only 17.8% of households had incomes of $100,000 or more in 2006. So despite the drop in purchasing power from the days of old, if you earn $100k or more each year, you're still in an elite group.

How can you get into the six-figure club? There are many roads to this golden path (lottery, inheritance, take over a family business, etc.), but many, if not all, of these are out of your control. As such, I'm going to focus on what I consider to be the method that will give the most people the greatest chance of earning $100k or more -- by developing a career and growing it over time. Specifically, I'm going to tell you how I got to six figures in seven years and how you can use these principles to do the same.

You're probably skeptical. I'm ok with that at this point. Read on with an open mind and I think you'll be pleased. And while I can assure you that the tips below are proven and repeatable, I must admit that they're also challenging. Therefore I'd like to make the following perfectly clear before I get started:

These suggestions are difficult to follow. They require tough choices, time commitments, sacrifice, discipline and a bunch of other traits that most people don't want to bother with. If they did, many more workers would make six figures. That's their choice, of course, but these same people should then not complain that the steps won't work (or are too hard or whatever.) This piece is NOT titled "Five EASY Steps to Six Figures in Seven Years" for a reason -- they are not easy.
There are exceptions to these principles. Probably many exceptions. Just like with any personal finance advice, people's situations, skills, opportunities, personalities, likes, dislikes, and so on are different. What works for one person may or may not work for another.
I'm cheating a bit. Just to be completely honest, the seven years noted in the title are post-college (in my case post grad school.) One could argue that those years of schooling should count towards earning six figures. If you'd like to count them, go ahead. But "Five Steps to Six Figures in Thirteen Years" just doesn't have the same ring to it as the current title.
These tips will work. They worked for me. This is EXACTLY what I did to earn six figures in seven years. In addition, I've had many friends and colleagues do the same, so I know it's repeatable -- if you follow the steps.

I'll end this preamble by saying I'm not trying to brag (though I realize some of this may sound like it), just offer you a first-hand experience of what worked for me. In fact, if you want to see how much humble pie I've had to eat during my career, read my series detailing all the jobs I've ever held. In it, you'll see that my road was not smooth or without its own challenges. But even with those obstacles I've been able to live out the principles that follow and lead to a six-figure income. I hope you can do the same.

That said, here are my five steps to six figures in seven years:

1. Get a high-earning degree from a good school.

It's a fact of life that certain college degrees result in a higher earning potential. So graduating in one of these fields gives you a built-in jump on the pack as you try to reach six figures quickly. If you want to be a teacher, that's fine, it's a great and noble profession. But it's likely you won't be able to make six figures quickly (if ever.) If you focus on the top few degrees (and the professions associated with them), you'll get a big headstart towards reaching your goal.

Note that I suggest you go to a "good" school. In my opinion, you do not need to go to a top-notch college to make this work. I recommend going to the least expensive school that gets you the degree you need and the initial job you want. Once you do this, the school you attended makes very little difference in your career or earning potential. I went to a top 25 business school (not top 10 or even top 20), but I left with only $5,000 in debt and the job I desired from my targeted employer. Before I decided to go to my school, I knew the employer I wanted to work for recruited there. You should know the same. Just like a resume's main purpose is to get you an interview, graduating from college's primary purpose is to get you that first job and often a "good" school can do the job just as well as a "top" college.

2. Work for a name-brand employer at your first job.

No matter the field, there are certain companies that have an aura of respect around them -- companies that are known to be good trainers and that are admired by people in your field, around the country, and, if good enough, the world. Some of these include: Google, Apple, Disney, Nike, Procter and Gamble, the Mayo Clinic, Pixar, McKinsey, and so on.

There are two main reasons you want to work for a top-notch company: 1. They generally pay well (though maybe not the best), and you certainly want to have as high of a starting salary as possible and 2. Working for these companies gives your resume an added boost since they are "known" to develop excellent workers. As such, they are companies that other companies recruit from, offering you more (and better) job opportunities in the future. Almost twenty years after I worked at one of these great companies I have colleagues, recruiters, and employers (when I'm interviewing) regularly say something like, "Wow, you worked there" or "You have some great experience" simply because I worked for a name-brand company two decades ago.

How can you get employed by one of these companies? Simple: go to a school where the company recruits (review point #1 again). Beyond that, network with alumni, school administrators, and anyone else associated with your target company (or companies) to give yourself the best advantage of getting hired. I happened to know an undergraduate student that went to my target company during my second year of grad school. I kept in touch with him and he was instrumental in getting me hired (and we eventually became roommates.)

3. Perform.

There's no way getting around it -- if you want to be on the earnings fast-track, you need to be on the high-end of the performance scale. What does this mean exactly? It means you need to find out what your employer expects of someone in your position and give them much more than that. If your expectation is to save the company $50,000, work to save it $100,000. If you need to grow sales 7%, work to grow them 12%. If your goal is to get five new customers ordering your product, work to get eight. If you over-deliver versus your expectations and so consistently and with a variety of different projects, you will be a high-level performer and receive a commensurate level of financial rewards.

In addition, you can really super-charge your performance (and thus your pay) if you work on any of the following:

problem projects (turning them from problems to advantages for the company)
important, high-profile assignments that get you noticed by those higher up in the organization
big businesses that are vital to the company's success.

Of course, these opportunities are a double-edged sword -- they can propel your career if you succeed, but they can also devastate it if you crash-and-burn.

Finally, having a good, pleasant attitude is at least a tie-breaker (some say it's more) that will help you advance in your career. Everyone likes performers with good attitudes more than performers with poor attitudes, so be positive -- it might just pay off for you (literally.)

4. Manage your career aggressively.

Big pay bumps, even for high fliers, don't usually come with the frequency or size that they should. After all, many employers are quite happy giving you the least they can even if you're slam-dunking projects left and right. That's why you need to:

Regularly ask for raises (FYI, if you're doing #3, asking for and getting a raise becomes a whole lot easier).
Ask for promotions when available (these usually include a decent salary bump.)
Network regularly with people both inside and outside the company. Some of these interactions will help you discover opportunities for advancement.
Consider moving companies. This can be a good strategy since many of the biggest increases in both pay and responsibility can be found with a company shift -- especially if you're moving from one of the companies listed in point #2.

The main point I want to emphasize here is you can't allow your career to be on auto-pilot. If you do, you'll get auto-pilot raises and auto-pilot opportunities, and you'll severely limit your chances for making the big bucks. But if you work at it, you can get regular, meaningful salary increases -- something that's even more important than starting with a high starting salary.

5. Have some luck.

I hate that this is on the list, but I have to be honest, luck is a factor in the success of your career. The reason I hate it is that it's the one tip you can influence the least (if at all.) Sure, you can try and "make your own luck" by putting yourself in the right situations, accepting the right jobs, selecting the best employers and so on, but ultimately, much of life and the results of work are out of your hands. All I can suggest here is to look at all the pros and cons of a job change, promotion, business situation, etc. and consider them carefully -- trying to maximize the number of events where luck is in your favor and minimizing the ones where you get bad luck. Also learn to ride good luck as long as you can and cut your losses as quickly as possible when bad luck shows up.

That's it. Those are the five steps I used to grow my income to six figures in seven years, and they're the same tips that have helped me maintain my income growth past that point. I can't guarantee that they'll get you to six figures in seven years, but I can say that if you apply them to your career, I'm pretty confident that your income will grow much faster than it would have if you had not applied them.

Some of you may be thinking "That's great advice -- I wish I had it 20 years ago." In other words, you're past the point where a few of these steps work, so what can you do now to increase your income? My suggestion is to get into the process above at the earliest possible step. For example, if you think it’s worth it and you have the time and money, consider going back to school (step 1) to get a new/better degree. If this isn’t a possibility or not very practical, start networking your way into a name-brand company (step 2). And if this isn’t feasible, everyone can at least start with step 3 no matter where they are in their career. The later you jump into the process, the less impact it's likely to have on the goal of reaching six figures. However, applying even just the latter steps (especially #3 and #4) will allow you to grow your income far more than it would if simply left to drift on its own.

Carnivals for the Week of Nov 16

2009-11-20T05:19:00-05:00

For weekday updates of what I find to be some of the most interesting personal finance articles on the web, follow me on Twitter. For now, here are the carnivals Free Money Finance was in this week and my posts that were included:

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.

How to Define Net Worth

2009-11-19T16:45:00-05:00

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on how to define net worth.

Here are the two ways he defines net worth in the book:

Augmented net worth is the "traditional" definition -- assets minus liabilities. It includes ALL assets and ALL liabilities. Specifically, it includes the market value of your home as well as the debt for your mortgage.
Net worth as he describes it in most instances refers to investment levels. If someone has "investments" (such as stocks, bonds, mutual funds, equity shares in a private business, annuities, net cash value of life insurance, mortgages and credit notes held, gold and other precious metals, CDs, T-bills, savings bonds, money market funds, checking accounts, cash, and income-producing real estate -- in other words, anything that's fairly liquid) of over $1 million, then he's considered a "millionaire." The author goes on to say that there are less than half of these millionaires that the "millionaires" listed when augmented net worth is used, so it's a more stringent criteria and excludes people that are "house rich" but not really wealthy (they way he defines wealth.)

The second definition of net worth leaves me wondering if he takes debt into consideration in any way. He doesn't mention (at least so far in the book) that the investments are net of any debt, and this is troublesome. To take it to an extreme, I could borrow $1 million, put it in investments, and he would consider me a millionaire, even though my "real net worth" (assets minus liabilities) was zero. This leads me to believe that he somehow does take debt into account (or maybe people with $1 million in investments simply don't have much debt), but I wish he would say so.

Personally, I think both net worth measures have value. The "net worth" I track for our family is augmented in that it does include the value of our home. That said, our home (with no debt on it) is less than 15% of our net worth, so it's not a big deal. But I do look at "liquid assets" as well. I'm a bit more stringent than his investment-based definition above on this one -- I eliminate assets/investments in 401ks and IRAs, longer-term assets that would be hit with some sort of penalty if I was to withdraw them. Anyway, Quicken makes it pretty easy to slice and dice our financial information, so it's easy to look at things several different ways to get a picture of where we stand. But in the end, what he defines as augmented net worth is the key measure I track.

How about you? How do you define/track your net worth?

Mindless Spending: Frequency Matters More Than Height

2009-11-19T11:45:00-05:00

The following is a guest post from Marotta Wealth Management.

Dieting and budgeting face similar hurdles in the American lifestyle. Some of us live to eat; others eat to live. Attempting to reduce our spending is every bit as challenging as trying to slim our waistlines. Some shop to live; others live to shop.

We can better understand mindless spending by looking at some of the psychological studies that Dr. Brian Wansink describes in his book "Mindless Eating." He explains, "Everyone--every single one of us--eats how much we eat largely because of what is around us. We overeat not because of hunger but because of family and friends, packages and plates, names and numbers, labels and lights, colors and candles, shapes and smells, distractions and distances, cupboards and containers."

"We all think we are too smart to be tricked," warns Wansink. "That is what makes mindless eating so dangerous."

One study compared the amount people would drink using two differently shaped glasses. One glass was tall and skinny. The other was short and wide. Each glass had the same capacity, but people would drink 25% to 30% more from the short glasses than the tall ones.

Interestingly, our brains focus too much on the height of objects and underestimate the effect of their width. So people with short wide glasses had to fill them more before they believed they had consumed the same amount as those with the tall skinny glasses.

We all think we can't be fooled by something as obvious as the shape of a glass. But our brains are wired that way, without exception. If you want to drink less, you can measure every portion or simply buy tall skinny glasses. Better yet, buy glasses that are very narrow at the bottom or elevated on a stem.

Finances work the same way, and by extension, so does mindless spending. Many families are struggling to get a handle on their savings. They are trying, often in vain, to find ways to cut back. But when we are worried about our expenditures, we tend to look at the dollar amounts more than the frequency of our purchases.

For example, a young woman named Emily inherited a sizable sum of money. She could have used it to make a sizable down payment on her first house. But instead of protecting her windfall, Emily attached a debit card to the account for the convenience of paying for a few items she needed.

In less than two years she had spent most of her inheritance in increments of no more than $35. That doesn't seem like a lot of money because the $35 height is relatively small. Given a width of three times a week, the height isn't even noticeable. The same $105 Emily spent would have seemed like a much larger budget item if it had been in a single purchase. In that case she might have refrained from handing over her debit card so casually.

Other purchases were $50 monthly memberships or $100 a month services. Very few of these purchases were over $100, but when they were added up, Emily had drained her account.

The frequency of a purchase matters even more than its height. But our brains tell us to be more concerned about the height.

Marketing firms use this principle all the time to bypass our defenses when they break annual purchases down into low monthly payments.

An offer I received in the mail recently explained its cost as "Only $4.99 per month with an annual subscription (billed as one payment of $59.88)." The advertised rate only applied if you were willing to purchase the entire year. If you wanted to be billed monthly, the rate was $9.99.

Advertising a $59.88 annual subscription fee as $4.99 per month relies on the fact that consumers are more sensitive about height than breadth. Note that the primary way they advertised the subscription, $4.99 a month, was not one of the options! Even more deceptive would have been making the offer 16.4 cents a day for an annual subscription. Less than a penny an hour!

They even marketed as a feature the service of charging your credit card automatically each year: "All subscribers get the hassle-free advantage of the Unlimited Automatic Renewal Program. At the conclusion of your first term and each subsequent term (one year or one month) we will automatically renew your membership upon expiration for the same period so you get continuous service unless you tell us otherwise."

Madison Avenue takes advantage all the time of the way your brain works. So it's in your best interest to learn to use your brain to your own benefit.

We recommend that every household have a dollar limit that domestic partners agree not to exceed without consulting the other. This way they can avoid budget busters, single items that can wreak havoc on a spending plan. The same caution ought to be put in place for any reoccurring charge, no matter what the price.

Similarly, when people are seeking ways to reduce their spending, they tend to look at big-ticket items or daily needs. A much less painful and more productive alternative is to look at the purchases you don't have to decide about every day (e.g., automatic subscription services).

Consider that the average family spends hundreds of dollars on a host of monthly services such as iPhone, Skype, TiVo, Netflix, Palm Pre, GPS Pet Locator, World of Warcraft, The Sims Online, anime subscriptions, comic subscriptions, health clubs, season tickets, and online file sharing or backup. Average people who can't afford to pay for their own health-care costs pay twice that amount in monthly subscription fees.

And each of these monthly fees is laden with extra features for an additional charge. Before the era of cell phones, I would save my quarters. If I needed to call home, I would stop at a pay phone. In addition to driving safely without the distraction of talking at the same time, which of course is still advisable, my phone expenses for the month were minimal. The latest base cost for an iPhone over two years is about $4,000, which could go a long way toward covering a family's annual health-care costs.

If you can afford a full-featured cell phone, by all means indulge. I assume you've done your retirement planning and are saving more than enough each month. If not, and you only need a cell phone for emergencies, however, buy a single-use cell phone and keep it in your car. You will only pay for the minutes you use, and the money you save will be significant.

If you saved and invested $2,000 a year at market rates of 10% a year, you would have about a million dollars in 40 years. Every young person with an iPhone is missing a million dollars at retirement to fund that trendy subscription.

Cutting back on reoccurring spending is easier because you don't have to decide every day to refrain from spending. Sometimes it is as simple as deciding to eliminate features. Extra charges accrue for voice mail, another for call waiting and still another for unlimited text messaging. If after you have dropped all these subscriptions and features you decide you really miss them, you can always add them back later.

If you are trying to cut back on your spending and save money, review every reoccurring charge on your credit card. Try living without the service or at least eliminating features. Many companies will release you from your contract and cancel your service for reasons of financial hardship. If you need to stop paying immediately, cancel the credit card being charged and get a new one.

Take your savings and set up an automatic transfer to your investment account. You can achieve big goals by making small changes consistently over time, which is the cornerstone of successful financial planning.

And although our brains aren't wired to realize it, frequency matters even more than height.

Gift Catalog Donation Made

2009-11-19T05:29:00-05:00

Just like we have for the past several years (check out last year's entry for more details on what we do), my family recently completed our annual selections in the Samaritan's Purse Gift Catalog. In all we contributed to 17 of their 48 options including the following highlights:

Hot meals (option #1)
Teach a child to read and write (option #2)
Clothing and shoes (option #9)
Help a farm family grow a bountiful crop (option #17)
Baby chicks (option #22)
Life-saving medical equipment (option #30)
Supply a community with clean water (option #36)

I've noted recently that the poor of the world have been on my heart. This gift catalog really addresses many basic needs of those so less fortunate. That's why we love it so much and have been contributors for so many years. Samaritan's Purse really helps the needy around the world and does so very efficiently -- they get the highest rating possible from Charity Navigator. I recommend them highly if you are thinking of making a similar donation any time soon.

BTW, for those of you who don't know, all the proceeds from Free Money Finance are given away to charity. Every single penny from the beginning of this blog almost five years ago has gone to charity. Two years ago we topped $100k given and I'll bet we're now close to $200k. Anyway, I'll give you an update in January like I do every year, but for now I just want to say how much I appreciate you being part of this website. It's because you read and visit the site that it generates anything at all -- and those are the proceeds that go to help hurting people all over the world! Thanks for being part of the giving team!!!!!

Women Have Unique Financial Needs

2009-11-18T16:45:00-05:00

The following is a guest post from Marotta Wealth Management.

Retirement planning is even more crucial for women than for men. Although most women are married, 85% outlive their husbands and are alone during their last years. Financial planning must address the unique issues facing older women who probably worked fewer years and earned less money than their spouses.

Sophie Tucker, whose early claim to fame was the song "The Last of the Red Hot Mamas," said at age 69, "From birth to age 18, a girl needs good parents. From 18 to 35 she needs good looks. From 35 to 55, she needs a good personality. From 55 on, she needs good cash. I'm saving my money."

Sadly, many older women lack good cash. Five of eight women rely on a husband's work records to receive their Social Security benefits. And for almost three of eight, those benefits represent 90% of their total income. Of those seniors who live in poverty, more than half are women.

Planning to have good cash must begin long before retirement. Many frugal and hardworking parents sacrifice to give their children the comforts that money can buy. In the process, however, they rob their children of character-building lessons they can only learn through personal experience.

This psychology is especially true for daughters, who are often protected from the discipline of handling money. Our daughters can only gain experience if we give them real responsibility. In other words, they need a safe way to learn the lessons of irresponsibility. As early as possible daughters should be given the slice of the family's budget that most directly affects them. By the time they are teenagers, they could be handling much of their own money.

A teenage budget offers financial training wheels. Only if teenage daughters are given money for clothes can they learn the tradeoffs between expensive outfits and other spending choices. Remember, not having sufficient money for everything you want provides a financial lesson that cannot be learned any other way. By giving your daughter enough money for all her wants, you're actually depriving her of future financial satisfaction and stability.

Be sure to include your daughter in family discussions about charitable contributions too. As children take charge of their own money, they can also learn generosity by choosing the organizations they want to support.

Parents are apt to require their sons to take a first job and protect their daughters from the working world. But by age 14 daughters should be working and funding their Roth IRA accounts. If you want to help, offer to match whatever your daughter earns so she can put your contribution into her Roth and still have spending money.

Every seven years a woman waits to start funding her retirement halves the amount of money she can save. Helping your daughter add $2,000 annually to her Roth IRA for the years between age 14 and 19 actually is a better choice than starting her at age 20 and funding her account for the rest of her life.

From age 18 to 35, Sophie says women need good looks. What they really need is a fiscally responsible husband. Often women leave the workplace completely to raise a family. Yet because women generally live longer and earn less, they cannot leave their retirement planning to later in life. A loving husband makes sure his wife's retirement isn't sacrificed to his career and the children's needs.

My advice to all women: Make your retirement a priority. You may be more concerned for your family's needs than for your own safety. Just as you must do in an airplane emergency, put on your own oxygen mask first so you'll be able to help those around you.

Fund your retirement even if you don't work. Unemployed spouses can still fund their retirement through traditional or Roth IRA accounts or simply by savings in a taxable portfolio.

Don't guess at the amounts you should be saving. Know what goal you are trying to achieve.

In addition to inflation and interest, retirement planning needs to take into account taxes, capital gains and the different ways to save: taxable, tax deferred and Roth. Retirement planning also involves projections of accumulating assets for 40 years and spending during a retirement nearly as long. You can't compute how much you should be saving on the back of a napkin.

Know what percentage of your retirement goal your current assets can grow and cover, so you can determine if you are ahead or behind schedule. It also helps to calculate if you are pacing yourself correctly. And then you can decide how much you need to be saving each month toward your retirement.

Pay yourself first. Your savings should be automatic. You won't miss what you don't see.

Automating your contribution to an employer-defined contribution plan is easy. If you aren't employed, you can still automate a taxable savings plan. Most brokers offer a link between your investment account and your checking account and also an automatic transfer between the two. It's a painless way to move money each month into your retirement or savings account.

Save and invest as little as $100 a month for 46 years earning 10%, and you can retire with a million dollars. And $500 a month grows to an astounding $5 million. Those gains can only happen if you start saving while you are young. If you are beginning later in life, you will have to save and invest more each month.

From age 35 to 55, Sophie says a woman needs a good personality. By that time in her life, Sophie was running her own company. At this point many women have finished raising young children and have time for business ventures. Serendipity in the business world often arises from our reputation for kindness. Sophie showed kindness even to strangers as a part of the Jewish practice of "tzedakah."

Best translated as "righteousness" or "justice," tzedakah goes beyond charity. It is the responsibility to reach out to others, giving of our time and money. According to the great philosopher Maimonides, the highest form of tzedakah is providing a person work so he or she can remain independent and self-supporting. Thus age 35 to 55 is a perfect time for women to turn their success into significance by starting a business.

From 55 on, Sophie continued to use her economic independence to help and empower others. She founded the Sophie Tucker Foundation, which contributed to a host of worthy causes.

Sophie Tucker continued working until weeks before her death at age 82. "The secret to longevity," she said, "is to keep breathing." Today's women are likely to keep breathing a lot longer. We recommend that women anticipate a retirement well into their 90s. Dying young isn't a good plan.

Preparing for retirement is more than putting money in an account. You must work periodically through mathematical assumptions and projections to ensure you will meet your retirement goals. Annual financial physicals ensure that your portfolio will remain as strong and healthy as you want to be.

Financial success is only one of the three components of a successful retirement. Having a healthy diet and staying active physically is equally important. And maintaining a good relationship with engaging and meaningful work is the most critical of all.

Sophie's gusto for enjoying a full life provided several generations with an example of a strong independent woman. Women at every age should be saving and investing at least 15% of the lifestyle they want in retirement. For every seven years they delay saving and investing, they cut that lifestyle in half.

Any plan older than two years is out of date. As your savings change, their projected value will cover a different percentage of your retirement goal. While market returns fluctuate and your standard of living increases, you may need to adjust your monthly savings. And your investments should grow gradually more conservative as you approach retirement age.

Financial independence opens doors for success and significance later in life. As Sophie Tucker reminds us, "I've been rich and I've been poor--and believe me, rich is better."

25 Guidelines for Living Your New Money Story

2009-11-18T11:45:00-05:00

The following is an excerpt from The Secret Language of Money: How to Make Smarter Financial Decisions and Live a Richer Life and lists 25 guidelines for living your new money story (making your finances what you want them to be.)

In the end, your actions are the language in which your money story speaks. Whether you choose to buy or not, to save, to invest, or to decide not to decide, your money behaviors will be the final expression of your beliefs, and will determine your financial success. Some of the following guidelines are restatements of suggestions you’ve encountered earlier in this book; some are new.

1. Keep your money mission statement always visible and in focus.

Your money mission statement defines the essence of your financial goals and the principles and ideals underlying them. It proclaims the meaning, use, and value of money to you, including short- and long-term plans. Keep this statement where you can see it often— on your desk, on your wall, on your computer—and review it periodically, refining it as needed, to make sure that it accurately orients your decisions with your purpose and philosophy.

2. Have a plan.

Create a strategy and a fully informed, well-structured financial plan, with provisions for saving and investment that are in alignment with your money mission statement, based on facts rather than on emotions. Periodically review your plan to make sure it reflects your purpose, your values, and your most up-to-date information and advisements from counsel you seek and trust.

3. Stick to your plan.

In times of trauma, crisis, or circumstances beyond your control, stick to your plan. In times of elation, unexpected growth, and great success, stick to your plan. When you are most prone to overreact, stick to your plan. When you recognize procrastination or failure to act or react, stick to your plan. When your plan isn’t working well, review whether you are fully executing the plan; if you are, then review the current validity of your plan. Once you are satisfied that your current plan is solid—then stick to your plan.

4. Seek out suggestions, critique, advice, and expertise.

Consult with people knowledgeable in specific areas. At times this may be difficult emotionally, when it would seem easier to consult (read collude) with someone who will mirror your views and agree with your opinions. The search for validation aims to maintain your comfort zone and avoid change. Consulting a mirror for advice is what the wicked queen does in Snow White. Leave the mirror for touching up makeup; for your plan, consult objective experts. Seek those expert in areas other than your own, and those with different points of view. Listen from another’s perspective, while not abandoning your own. Use that new information from a flexible and informed position. In addition to a financial advisor and other experts in specific fields, consider using the services of a coach, mentor, or mastermind group; they can provide invaluable perspective on how (and whether) your actions, decisions, and ideals are all in effective alignment, and if they are not, can help you reassess and realign.

5. Estimate expenses in detail.

Studies at the Robert H. Smith School of Business at the University of Maryland found that people spend less when they have to estimate expenses in detail. Don’t ballpark what your life and the things in it will cost. This is not a ball game, it’s your life. Get down to hard numbers.

6. Establish priorities.

Prioritize plans and pursuits based on core ideals and needs. Money and finances must be balanced with family, work, health, friendships, leisure, making a difference in your community, and taking care of yourself. Neglect or imbalance in one area may generate overcompensation in other areas. Priorities are not static; they are not something you can figure out on a weekend and then set aside for the rest of the year. (Remember the penguins.) You will likely reconfront, refine, and even redefine priorities every day, and make decisions based on your fresh answers to the fundamental question: What is really important?

7. Align your internal ideals with your financial goals.

Your ideals, the internal model of who and what you are, generate the unspoken assumptions on which you operate. Clarify your external goals to be certain that they are consistent with your ideals. The clarity and consistency of your principles and goals can be called on at times of emergency or confusion to help bring the big picture into focus. Be certain there is a fit between your internal and external goals, that what you want to accomplish is consistent with your ideals. This consistency can provide an organizing structure and direction to your ambition.

8. Distinguish needs from wants.

A need is an essential requirement, a necessity for mind, body, or spirit. You can get sick if you don’t have enough of what you need: nutrition, touch, rest, or security. A need can be satisfied. You can also get sick if you have too much of what you want (for example, Mexican food, alcohol, sexual freedom, solitude). Wants (wishes and desires) are replaceable with other wants, but a need cannot substitute for another need. And you can never get enough of that which you don’t need.

9. Determine what is good enough.

The pursuit of perfection results from not having a standard of what is good enough. “More” is not a goal. More money, like perfection, is a quest never satisfied. For perfectionists, failure may even be a relief, ending the relentless and impossible pursuit of perfection. The undefined pursuit of “more” is a guaranteed plan for failure. As playwright Neil Simon said, “Money brings some happiness. But after a certain point, all it brings is more money.” Having an endpoint lets you know when you arrive, when you can feel satisfaction, when you can experience effectiveness and mastery at reaching a goal.

10. Know what reaching a goal will do and what it will not do.

Monetary wealth can provide pleasure, luxury, and financial security, but it may not make your marriage better. It is important to know what achieving a goal will do, so that you have the clarity to distinguish what it will not do. A common mechanism for keeping hope alive is stopping short of a goal so there is no need to confront the illusion that reaching the goal will provide all the hoped-for solutions. Reaching a goal will not undo the past, or make other troubles go away.

11. Don’t invest with your heart.

Never fall in love or hate with a stock—it won’t love you back. It doesn’t even know that you own it. Invest in the stock or bond of a company that you genuinely want to own, not in a “hot trend” or “good story.” Remember that if someone tells you it’s “a sure thing,” it isn’t.

12. Don’t use credit cards.

Numerous studies have shown that people spend significantly more (on average, 23 percent more) when using credit cards than when paying with cash or check. Credit cards make money an abstraction, as well as relegating payment to a future time. Pay in cash.

13. Consider the opportunity cost of your purchase.

Before you spend significant money on an item, calculate what it would be worth in five years if you were instead to invest that same money. And in 10 years.

14. Consider the absolute value rather than the anchor price.

Seventy-five percent off a jacket that’s overpriced by 300 percent is not a deal. A “sale price” is meaningless if it is anchored in an inflated initial price.

15. Consider the actual product and what you will do with it if purchased.

Will you really use it? For how long? One year from now, what choices will you be glad you’ve made?

16. Be suspicious of being “special.”

Special offers or other indications that you are in a select group—an inner circle of unique consideration—will make you buy more than you need. Special, exclusive, unique offers induce a desire to respond with gratitude—and with purchase. Be suspicious of special offers.

17. Simplify your symbolism.

Designer brands are marketed to symbolically represent quality, desirability, and the experience of having arrived. The symbolism of specialness adds cost. The qualities that we attribute to brands create a relationship with the brand that results in both desire and the commitment to pay more. Ask yourself whether you’d pay the same amount for a product if the logo were changed and nothing else.

18. Leave emotions at home.

Emotions hijack the logical brain, and along with it, reasonable decisions. Stress may seek relief through buying, hoarding, or purchasing out of other emotional needs such as insecurity or a desire to win approval. Make financial decisions independently of emotional decisions and distinguish between the two. Worry about the right things.

19. Shop alone.

The social contagion of shopping with friends induces a relaxation of usual constraints, as well as the desire to impress friends with a purchase.

20. Remember that you have the right to say “No.”

Don’t hesitate to say “No.” And don’t hesitate to say yes either when you are clear about what you want and need. The other person in your interaction also has a right to say no or yes. Don’t hesitate, for example, to make a simple request for a fee for service equal to its value.

21. You have to be free to say no before you can be free to say yes.

Unless you are free to say no, yes has no meaning.

22. Disengage from “what might have been.”

Getting what you always wanted in the past may not feel as good as you expected, because it’s no longer the past. If you attempt to reenter an old story and acquire what you missed in the past, it won’t work. “If only” fantasies erode the power of today. To keep a goal just out of reach maintains the “someday” fantasies associated with it. “I’ll lose the 10 pounds, and then I’ll be happy.” The weight-loss goal must remain elusive, or the hope of happiness contained in the loss of the last 10 pounds would be exposed as illusion. The unattainable becomes addictive. It is difficult to sell a stock that has declined significantly. The sale makes a reality of money loss rather than a theory of paper loss. The sale also banishes the hope of future gains. You have to relinquish a past position in order to move ahead. When you let go of the past, you reclaim your aliveness (and effectiveness) in the present.

23. Keep the big picture in mind.

A study by the Joseph Rowntree Foundation found that wealthy Londoners do not feel rich, because they never mix with people less affluent than themselves. When you take a good look at the global neighborhood and realize that half of humanity lives on less than $3 a day, it puts things in perspective. According to University of California sociologist William Domhoff, “In the United States, just 20 percent of the people own a remarkable 85 percent of the wealth, leaving only 15 percent of the wealth for the bottom 80 percent.” It’s good to keep the big picture in mind. The big picture consists of your own ideals and principles, and objectively organizing your life and decisions according to what you believe to be in your best interest. Whenever you might be caught up in details or in the grip of emotion, stop and ask, “What is in my best interest?” The next right step may not always be clear, but you can almost always be clear about what the next right step isn’t.

24. Strike while the iron’s cold.

A study from UCLA found that when purchases were interrupted by a conscious break in the buying process, purchasers became more objective and discerning about the need to buy. Neuroscientists at Emory University found that this delay disrupted dopamine release. A drop in dopamine after you buy is called “buyer’s remorse.” That same drop before you buy is called “coming to your senses.” There are few true emergencies in life. Most decisions involving money really do allow time for consideration. Weighing different factors, gathering data, and perhaps consulting experts works best to make most decisions. Rarely does any legitimate crisis demand that these steps be skipped. In between urge and action lies a gap: Impulsivity erases that gap, while emotional intelligence seeks it out. Create a contemplative pause—a space of time between choosing something and paying for it. Postpone all decisions based on impulse, frustration, or anger until you have regained objectivity. Calling a time out is a useful maneuver for emotionally charged matters. “Let me think about that, and I’ll get back to you,” is a decision. A wise mentor once told me, “Never speak more clearly than you think.”

25. You’ll never do anything important or fulfilling that will feel comfortable at first.

Growth and progress always feel uncertain in the beginning. At the point of jumping in the pool for the first time to learn to swim, you can either proceed despite your discomfort or abandon your task and immediately stop the anxiety. Anxiety signals that you are moving ahead into a new experience—it is not an indication of danger or inability. You have to proceed despite anxiety in order to master the task. If worrying about the future fills the present, both are diminished. A plan is only a guideline, not a certainty. The capacity to endure uncertainty is the essence of growth. The only familiar territory is behind you. Danish philosopher Søren Kierkegaard said, “Life can only be understood backwards, but it must be lived forwards.” Growth and change are hard. In fact, the only thing harder is not growing or changing.

How to Graduate from Harvard for $40k or Less

2009-11-18T05:29:00-05:00

Here's a piece from Personal MBA that tells how to get a degree from Harvard for $40k or less. The highlights:

There’s a little-known back door to getting a Harvard degree: the Harvard Extension School.
All you need to do to become a student at the Harvard Extension School is pay a course fee and show up.
If you’re able to complete 3 Extension School courses with a GPA of at least 2.5, you’ll be able to petition for acceptance to the degree program. The admissions criteria are straightforward: if you meet them, you’re in.
The diploma that you receive upon graduation is issued by Harvard University, and there is absolutely no difference in the quality of the courses.
You’ll also have the same benefits of the Harvard reputation “halo” and network.
The total cost of an undergraduate program at the Harvard Extension School is ~$35,000-$40,000. For perspective, the cost of one year of Harvard College’s “normal” bachelors program is $33,696 for academic year 2009-2010.
Harvard Extension School also offers Masters and Professional degree programs

Here are a few comments on this issue:

1. While not as lucrative as it once was, getting a college degree is still a smart financial move especially if you make the most of your college degree by matching costs and benefits (the key is to avoid the college debt nightmare).

2. In addition to having "any" degree, a degree from Harvard gives you A) name-brand recognition and B) the vast network of high-powered alumni to use as you manage your career. Talk about putting your network on steroids -- from my experience, Harvard graduates stick together and help each other out throughout their careers. And since so many Harvard grads are well connected and hold high positions, who could ask for a better network?

3. Ok, $40k is not a drop in the bucket; it's still $40k. But it's a TON better than $160k!!!!

4. Glad to see they have advanced degrees too. Getting my MBA worked out for me and I didn't go to a top-tier school like Harvard, thought I may have if this had been an option when I went to school.

5. Is it really this easy? There's a catch here somewhere, right?

Seven Red Flags for Home Buyers (And an Update on Our Home Search)

2009-11-17T16:45:00-05:00

Kiplinger lists seven red flags for home buyers as follows:

Poor water pressure. Aside from issues of comfort and convenience, low water flow may indicate plumbing problems, such as corroded pipes that will need to be replaced down the road.

Ceiling stains. Something’s leaking.

Troublesome doors. If you have one bad door, it may simply have been installed incorrectly. But more than one may indicate a serious structural issue, such as a foundation that has settled or framing that is deteriorating.

Overloaded electrical outlets or lots of extension cords.

Exterior features that slope toward the home. A porch, patio, driveway or grading that slopes toward the home all but guarantees water in the basement.

Odors. Cigarette smoke and pet odors can be hard to get rid of. And if a home smells too clean -- heavy with the scent of cleaning products (especially bleach) or plug-in deodorizers -- the seller may be trying to cover up an odor, such as mold or urine.

Synthetic stucco siding. This must be installed precisely or else moisture will be trapped behind it, resulting in mold and decay.

A few thoughts here:

1. Some sellers don't get how important these are. We've seen many homes with one or more of these problems and the sellers are either oblivious to the sort of impression they leave or they think buyers are idiots.

2. Don't count on your real estate agent to point out problems like these. In my experience, agents will actually work to downplay these issues with comments like, "Oh, that's very common" or "You shouldn't worry about that" or "You'll only need to do ________ (something easy) to fix that." Don't believe them.

3. Notice how three of these deal with water damage (and the results of water leakage). Water is one of the most destructive forces to your home -- if not the most destructive.

As an update for those of you following along, we've all but abandoned the idea of moving to a new home. We started the process with the intention of only moving if we found the exact right fit (within reason, of course.) After three years of looking, it appears that we won't be able to find a home we like in the location we like with the land we like for a price we like. We're still keeping our eyes open (our agent sends us email updates now and then), but at this point the idea of a move is all but over. Instead, we're focusing on a few upgrades to our current home to make it an even better place to live.

Moose Tracks for Thanksgiving?

2009-11-17T15:31:58-05:00

As many of you know, Moose Tracks ice cream has been a sponsor of Free Money Finance from day one. And since you're likely a week or so away from some sort of feasting (not sure why I think that, it's just a hunch), I thought I'd suggest you consider some for your upcoming big meal. You can find Moose Tracks in your area by using their store locator service, then go and pick up a half gallon or two to add some fun and excitement to your Thanksgiving meal!

FYI, buying Moose Tracks is an economical option versus other alternatives. ;-)

What Professions are Likely to Have High and Low Net Worths?

2009-11-17T11:45:00-05:00

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire regarding the professions that have high and low net worths:

Highly compensated physicians, attorneys, and managers of public corporations tend to have low wealth indices; that is, they are highly concentrated in the [lower than expected] net worth levels. Managers of private corporations are not. They tend to be quite frugal and invest heavily in their own businesses.

What other occupational groups have significantly higher wealth indices than the norm? Two of the more revealing are engineers and educators, such as teachers and professors. The financial lifestyles of educators, often the lowest-income-generating professions actually have high wealth indices that epitomize the [higher than expected net worth] population in America. Thus, I think it is safe to say that the ways and means to secure wealth building apply to almost everyone who wants to become financially secure.

A few thoughts from me:

1. Many people think that being a doctor, lawyer, or executive is a pathway to wealth (high net worth.) It can be, but more than likely it's a pathway to a high income which will not necessarily (and most likely won't) result in a high net worth.

2. I don't know many doctors and lawyers on a personal basis, but I know tons of business executives/managers. And I've seen time and time again that people who make smart, frugal decisions with their corporation's money have personal finances that are in shambles (many have come to me for advice.) On the other hand, those that own their businesses usually have rock-solid personal finances too. Says a lot about "ownership", doesn't it?

3. Told ya!!!! You won't believe the number of comments I've seen in four years that say "You have to have a high income in order to have a high net worth" (or something similar). No, you don't, and here's more proof of that fact -- some of the lowest-paid professionals (educators) are among the most wealthy professions. Sure, if all is equal (which it never is) having a high income is better than having a low one. But you certainly can achieve a high net worth without a very high income.

The Cost of Money

2009-11-17T05:29:00-05:00

The following is an excerpt from The Secret Language of Money: How to Make Smarter Financial Decisions and Live a Richer Life.

Mugger: “Don’t make a move, this is a stickup. Now, come on—your money or your life. [long pause] Look, Bud, I said, your money or your life!”

Jack Benny: “Give me a minute—I’m thinking it over!”

The joke, of course, was that Mr. Benny was such a skinflint, he placed a higher value on his money than on his very life. This routine got one of the biggest laughs of Benny’s long and illustrious career, and became the prototypical Jack Benny gag. Of course, no one in real life would say such a thing. Or would they?

An Expensive Hobby

When I met Denise she had been a collector all her life. One of her earliest memories was of collecting china dolls. The essence of her passion for collecting was the sense it provided her of being in control. In the act of acquiring, arranging, and rearranging her small family of dolls, Denise had absolute command over her little universe.

By her thirties her passion for collecting had grown, and she began purchasing through catalogs so as not to be distracted by having to interact with anyone. By age 40 she had switched to the Internet, spending many hours a day perusing online auctions, trolling for more china dolls. She was building a valuable collection, she told herself.

On many occasions Denise attempted unsuccessfully to curtail her Internet spending. She set a weekly limit of time and money, but promptly defied her own authority, rationalizing that the pursuit helped compensate for feeling lonely, empty, or depressed. Yet despite her belief that her continued collecting would make her feel better, the momentary excitement she would feel when the newest acquisitions actually arrived at her home would quickly fade. She soon reached the point where the only thing that would put a halt to her online activity was either exhaustion or when she would run out of money from her monthly trust allotment.

At 43, by the time I met her, Denise had developed considerable expertise and a collection of significant value to go with it. In addition to the hours she spent every day arranging and cataloging her collections, she was spending $8,000 to $10,000 per month from her trust fund on additions to her collection. Her preoccupation now absorbed most of her days and was draining away her inheritance. In a very real sense, it was draining away her life.

If Jack Benny’s mugger had burst in upon Denise and demanded, “Your doll collection or your life!” what would she have said?

The Cost of Money

I first entered the workforce at the worldly-wise age of eight, as a paid farm hand. On hot summer days I would chop cotton for my dad, earning a whopping ten cents a row. The work was hot, hard, and dirty. That summer, I earned every cent I made.

After work I would meet up with my classmates, many of whom were also experiencing their first forays into the world of autonomous economics. Topped up with change from their paper routes and chores, they would hit the nearest store, where they would trade in their fresh assets for sodas and candy. Naturally, I joined them. My treats were quickly gone, and my hard-won pay with them. I was left standing, tired and dirty, wondering, “Was that candy worth a half a row of work?”

It was one of my earliest lessons in the cost of money. Not its value—I knew exactly how much candy a dime could buy—but the price I had to pay to get it. I learned that you don’t just buy things with money; you have to buy the money with something, too. It wasn’t long before I learned to ask myself, “Will I get enough from this soft drink to justify one row of cotton chopping?” The answer was no.

Yet as simple as this lesson would seem to be, it is one that we hide from ourselves again and again.

Money Quiz

List five things in your life that you value.

1. ____________________________________________________
2. ____________________________________________________
3. ____________________________________________________
4. ____________________________________________________
5. ____________________________________________________

Now: Which of these five things would you willingly trade for money?

Chances are good that if you listed five things that you truly value, your answer was something like, “None of them!” After all, if it’s something you value highly, why would you trade it for mere money?

On the other hand, depending on what you put on your list, you may have thought about answering the question with another question, such as, “Just how much money are we talking about here?”

That is the question David and Diana Murphy wrestle with in the novel and film Indecent Proposal. Desperate for money during an economic reversal that threatens to take away everything they have, they hit Vegas in hopes of winning big. The stakes are raised when David is approached by a wealthy man who offers to give him one million dollars—in exchange for one night with his wife.

Even as children we are fascinated with endless variations of this lurid dilemma. How many of us remember playing the game that goes, “Would you [fill in the blank with a despicable or repellent act] for a million dollars?” As grown-ups, we get to watch the fantasy play itself out—and reality TV shows are only the latest in a long tradition of “Can you believe they did that for money?” spectacles.

Hardly a season goes by without yet another sensational story in the press about a politician, sports star, or high-profile businessperson who gambled his or her entire career playing some version of this game and acting out the answer. We shake our heads with disbelief, because we would never do that.

Would we? Perhaps not, at least not in such a dramatic, high-stakes way as with Denise, or David Murphy, or whomever sits at the eye of the latest media-scandal storm. But are there smaller or more subtle ways in which we do exactly that?

Here are some of the most common compromises we make, often without fully realizing we’re doing it, in our struggles to sort out the most important layers of meaning in our lives.

Trading Time for Money

Of all the precious things we trade for money, by far the most common is time.

Time is the basic unit of exchange for most of the working world. If we want more money, most of us need to spend more time to get it, and the trend has been for us to want more and more of it.

Yet we also insist that it’s time we want, and not the money itself. A survey by the Pew Social & Demographic Trends Project found that 67 percent of respondents ranked free time as their most important priority, compared with only 13 percent who valued wealth the most.

At least, that’s what we say. How we act tells a different story altogether. Collectively, American workers give a whopping 1.6 million years’ worth of unused vacation time back to their employers every year. That’s leisure time which we choose to trade for more money, more accolades, or the hope of climbing one rung higher on the ladder.

The irony of our time-money exchange is that we keep trading time for money in order to buy back more time. And time is running out.

Trading Freedom for Money

Lamar founded a thriving personal service business. His company and its growth were his creation, an expression of the creativity he had not experienced working for others, or earlier working for his father in a similar business. Although he had given much of his personal time and energy to the long hours in the dozen years to grow his company, he enjoyed being his own boss.

Lamar used money to represent the freedom that he had created—to do whatever he wanted, whenever he wanted. He felt good about his accomplishment, and the money he had amassed.

Then he decided to cash in on his hard work, and sell his company to a large, multinational corporation. The deal promised a massive profit, a windfall Lamar simply couldn’t pass up. He stayed on as a consultant, but his narrow role in the new system felt confining to him. He was now wealthier by an order of magnitude, but no longer CEO of his own company. Lamar finally realized that he had paid the currency of freedom to acquire its symbol, the wealth of money.

Trading Health for Money

In 1969, a young worker at a large Japanese newspaper corporation died of a stroke. His death would become the first official case of karoshi, or “death by overwork,” a phenomenon that The Economist would later call the corporate equivalent of hari-kari. By the 1980s, karoshi was legally recognized as a cause of death in Japan, with court judgments for the families of victims rising as high as a million dollars.

While karoshi remains an extreme example of the impact of the time-money exchange, overwork is taking its toll on our health in other ways. The American Institute of Health estimates that stress has a $300 billion cost, exacted in the form of turnover, compensation, insurance, medical expenses, and reduced productivity. Increased incidences of mental health conditions, particularly anxiety and depression, are being linked to work and money-related stress.

We’re suffering mentally and physically, and the problem seems to be worsening.

Trading Family and Relationships for Money

If there ever was a time when the stereotypical image of the father and son playing catch on the weekends was true, it’s behind us. Americans spend about 40 minutes each week playing with their kids. That’s less time than we spend shopping and watching television by a very wide margin.

It’s not only our children who feel our inability to understand the language of money. Money is the most common relationship conflict for couples. A survey by the Financial Planning Association found that 40 percent of financial advisors cited money as a “key factor” in a couple’s decision to split up. And while many of these relationship issues really are about money, many use money as a language to express relationship conflict or the dynamics of power. Who controls finances? Who makes big money decisions? How are money disagreements resolved?

The same money equation that uses money as a currency for power can destroy the very relationships that might provide love and happiness.

Trading Happiness for Money

In their book Being: The Foundations of Hedonic Psychology, a group of scholars examined the connection between money and happiness and found that money correlates weakly with happiness (about equally with good looks and intelligence).

And the strongest correlation with happiness? Marriage. The very thing that too often suffers most in the quest for financial gain turns out to be the single most likely predictor of happiness. After marriage, the next strongest happiness predictors were other relationships, including family and friends, and immersion in life, exercise, and spirituality—all things that we frequently sacrifice in the pursuit of wealth.

Our pursuit of happiness through wealth would seem to push joy only farther away and replace it with fear, envy, greed, and shame.

Trading Wealth for Money

Is it possible we’re sacrificing wealth in the pursuit of money? As paradoxical as that sounds, there is compelling evidence that we are doing exactly that.

In April, 2005, the United States officially became a nation of spenders. That month, we spent more than our after-tax incomes, creating a negative savings rate. The trend continued into the following year, and 2006 marked the first full year since the Great Depression that we spent more than we earned. A look at the balance sheet of the average American citizen in 2006 and 2007 would reveal that they were worse than broke.

The middle of the first decade of the twenty-first century, however, was anything but the Great Depression. Incomes had been increasing for decades—there had never been a better time to save a few extra pennies—but climbing along with our income (and eventually surpassing it) was our spending. And that spending was driven by our money story.

Have You Ever Taken Risks to Try and Improve Your Career?

2009-11-16T16:45:00-05:00

If you've been a reader of Free Money Finance for more than 15 seconds you've heard me talk about the importance of managing your career. I've offered lots of thoughts on the subject of how you can build/grow/maximize your career, but I haven't dealt a lot with taking risks to boost your career (as highlighted in this piece from the Wall Street Journal.) I did mention taking risks a few times (mostly in passing) when I detailed all the jobs I've ever held, but I thought I'd add a few more comments/thoughts to the times mentioned in that series.

First of all, taking risks can definitely be a way to boost your career. Just like with investments, the higher the risk, higher the reward (usually.) So if you want to propel yourself and your career ahead by a leap or two, taking a big risk and being successful at it is certainly one way of doing so.

Of course, there's the downside to that option as well -- it's risky. And while you can try and select "risks" that you think you can control/deal with, events are often not controllable (especially when the situation is volatile.) In these cases, you can actually fail in your efforts and your career will take a hit (or two.) And thus the dilemma -- is it worth it or not to take risks to propel your career?

I've taken a few big risks (I think we all probably take minor risks here and there over time, but that's not the subject of this post -- I'm referring here to big risks that carry the chance for big success or crash-and-burn failure.) A few of the ones I've taken:

I moved to a new division that was in tough shape and the business I managed was in danger of going bye-bye. This was an instance where taking a risk paid off since I was able to turn the business around and was rewarded with more responsibility and managing a huge portion of our company's portfolio.
I changed industries and got a bit off the track that I had worked to develop the first several years of my career. I'm going to give this risk a semi-thumbs-up. The upside was that I enjoyed the company, the people, and the industry much more. It also set the path for my career that continued to lead to success. The downside is that I probably could have made more money staying where I was Oh, and that the job turned into a nightmare over time.
I joined a start-up during the dot com boom. I think we all know how that turned out. Luckily for me I landed on my feet, but this was certainly a risk that didn't turn out anywhere what I hoped for or expected. And to make matters worse, I invested in the company as well. Ugh.
I went to work for a very small, relatively obscure company. It's been a great place (good compensation too) to work for five years and I can actually see myself retiring from this place one day. On the downside, it's in an industry I'm not that familiar with and my old network has been lost as a result of the move. I'm not sure where my career would take me if I left this position. That's one reason I'm focused on building up my network.

How about you? Have you ever taken a risk to try and grow your career? What happened?

How to Become Wealthy

2009-11-16T11:45:00-05:00

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on how to become wealthy:

If you want to become wealthy [the way other wealthy people have], live in a neighborhood where your household is among the top income generators. For example, what if your household's total realized income is in, say, the high five figures? Then live in a neighborhood where the median market value of a home is less than $300,000. Do so, and the chances are that among your neighbors, your household will likely be in the top 20 percent along the income continuum. Then live and consume as though your household's income was only 80 percent of what it actually generates. Save and invest the rest. Now you are on your way to becoming wealthy.

What is a good rule if you are determined to become wealthy? The market value of the home you purchase should be less than three times your household's total annual realized income.

If you're not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's annual realized income.

A few thoughts from me:

1. I'm predicting that several people will hate this post. People don't like being told what sort of house to buy. ;-)

2. The author gives us the saving amount that seems to make most people wealthy (or so I assume from the info above): 20%. It looks like to me that if you can save 20% of your salary, you'll end up wealthy. There, now that is easy, isn't it? :-)

3. Do the two pieces of advice ("the market value of the home you purchase should be less than three times your household's total annual realized income" and "never purchase a home that requires a mortgage that is more than twice your household's annual realized income") imply that you should put up to 1/3 of a downpayment on any home you buy? If the home is worth three times your income and the mortgage can only be two times your income, that means you have to put at least 1/3 of the home's value as a downpayment, right?

4. I GUARANTEE that someone reading this (if not someone commenting) will say that the formula above will not work on the coasts and/or in higher-cost-of-living cities. My responses to that are:

I told you that living in more expensive cities is a drain on your net worth.

What about all those "great/high" incomes everyone is always talking about in big cities? As I've said, the higher salaries are more than eclipsed by higher living costs, and the inflated prices of homes is one of the biggest cost hits there are.

You can always rent.

If you don't want to become wealthy, there's no problem. Buy whatever house you want in whatever city you like.

Even if you buy a home outside these parameters, you still MIGHT be able to get rich if you are able to save the 20% of your income. I'm not sure, but it's at least an option to consider. (A way to do this would be to cut your spending in some other area where others spend more.)

5. I have to mention my formula for buying a house. Very similar to what they are saying above (though not as specific.)

6. The advice above is what we've used to buy our homes. Since we've been married, we've owned three houses. Here are the breakdowns on them:

House 1 -- Value was 1.4 times our household income, mortgage was 1.2 times our household income

House 2 -- Value was 1.4 times our household income, mortgage was 1.1 times our household income

House 3 -- Value was 1.2 times our household income, mortgage was 0 times our household income (we paid cash for this house)

My wife was working when we purchased our first two homes. By the time we got house #3 she was staying home full-time with the kids. These sorts of results are possible when do you what I've been preaching on this blog for years: manage your career to maximize your income, work to add additional income, and keep your spending under control. For the most part, this is also what the book advises, though they focus less on generating income and more on controlling spending.

Best of Money Carnival Now Available

2009-11-16T10:53:51-05:00

Just a heads-up that the Best of Money Carnival is now up. Congrats to all participants and especially the winning post, Abysmal Survey Results: Americans Don’t Understand Basic Financial Concepts.

BTW, I made the cut myself with my post titled How to Make Money as a Soccer Referee.

One final note: if you're a blogger and want a simple and easy way to drive traffic, contact me about hosting the Best of Money Carnival. I'm now taking hosts for the early part of 2010.

Steps To Grow Your Net Worth When You Don't Make A Six Figure Income

2009-11-16T05:29:00-05:00

The following is a guest post from Danny Kofke, author of How to Survive (and Perhaps Thrive) on a Teacher's Salary.

It seems everywhere we look these days, we see something telling us how bad the economy is and how tough times are. I agree that for some this is true but, from personal experience, you can still live a wealthy life on a moderate income.

My name is Danny Kofke and I am a school teacher and author of the book ""How to Survive (and Perhaps Thrive) on a Teacher's Salary". My wife, Tracy, is a former teacher and now stay-at-home mother to our two young daughters. Despite earning a moderate income, we have no debt except our mortgage, have a 12-month emergency fund, invest so that we are on track to retire with a sizable nest egg, and live a financially secure life on a teacher's salary.

Here are some steps Tracy and I took that have enabled my family to thrive on a teacher's salary:

Build Up An Emergency Fund

This was the key step for us. I think this is important in case Murphy's Law comes knocking. You never know when/if the transmission in your car will go or the air conditioning unit for your house breaks in the middle of August. Tracy and I wanted at least $3,000 in this fund before moving on to the next step (we added more later on as we had less debt). We wanted a couple months of living expenses in this fund in case an emergency - when I say emergency I don't mean a 50 inch plasma television either - happened. This way we had the cash on hand and did not have to use credit cards to pay for an unplanned event.

Pay-Off Your Debt

After getting $3,000 in an emergency fund, Tracy and I started paying off the debt we had. We paid-off our credit cards and car - we just had one car at this time. I know some recommend paying off all your debt at this point but we kept Tracy's student loan and our mortgage because we wanted to move on to investing so we could use the magic of compound interest to our benefit.

We paid off our credit cards by taking the card with the smallest amount first and focused on getting rid of that. I know some recommend paying off the card with the highest interest rate first but we wanted to build traction and see some results fast. I think money problems are mostly emotional. Most people know it is not wise to use credit cards but still do it because what they buy with them makes them feel good. We knew if we saw immediate results in paying off our debt we would be much more likely to stick with it. I think this is similar to someone trying to lose weight. If you go on a diet and lose 3 pounds in week one and 2 pounds in week 2 you are more likely to stick to it. However, if you don't lose any weight after a couple of weeks, you are more likely to start eating unhealthy again. I feel that getting out of debt is somewhat like losing weight - once you get the ball rolling and see results you are motivated to continue getting rid of it.

Invest/Continue To Build Up Your Emergency Fund

At this point, Tracy and I started to invest in a Roth IRA. We just started with $100 a month and have increased this as my salary has gone up. $100 a month does not sound like much but, if a 25 year-old invested this amount every month for 40 years and earned a modest 7% a year, he/she would have over $262,000 at age 65! I don't think this is enough to retire on but it is better than nothing.

In addition, at this point, Tracy and I steadily built our emergency fund up to one year's worth of living expenses. This was before the recession so a lot of financial advisors were just suggesting 3-6 months of living expenses in this fund. We knew that Tracy would be staying home for as long as possible - it is 5 years and counting now - and we wanted to make sure we had enough money to cover our expenses in case something crazy happened. This fund has turned potential catastrophes ($700 car repairs, expensive doctor's visits) into inconveniences. This might be too large amount for you, but this is what helps Tracy and I sleep soundly at night.

When dealing with your finances, you have to remember that the person that cares the most about them is the one that looks back at you in the mirror each morning. It is not some advisor down the road or someone on TV. The steps Tracy and I have taken have given us a sense of financial peace and have enabled us to live a wealthy life on a teacher's salary.

Opportunities Lost

2009-11-15T05:29:00-05:00

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

In the past we've discussed what Christians believe about giving (and how much -- or should I say how little -- they actually give). On a related note, I've even asked if our welfare state is a result of Christians not living up to their calling to give to the poor and needy. But I've never put a number on the difference between what should be given and what actually is donated. Well, now someone has.

Check out this piece which details how much extra money would be available if Christians simply lived up to their commitment to give:

Are U.S. churchgoers stingy? That's one possible conclusion from a newly updated report that shows if parishioners tithed the biblically recommended 10 percent of their income -- instead of their current 2.56 percent -- an extra $161 billion would be flowing to charity.

Whether you believe in tithing or generous giving, it seems to me that 10% of gross income is a reasonable giving goal for Christians to shoot for. And if we all did give 10%, we'd have an extra $161 billion to feed the poor. Now look at where our government spends our money and see what $161 billion PER YEAR could do. I'll save you the time and cut to the chase: it could do a lot.

Before I go on, let's round out this discussion with a few more bits of information:

Churchgoers, at 2.26 percent given to charity, outpaced the general population, which gave 1.8 percent. Nearly two-thirds of all U.S. charitable donations were funneled through churches or religious institutions.

Financial vitality, they say, is a key indicator of overall church health. Money given to the church is divided into two sub-categories for analysis: benevolences (such as international and local missions, denominational support and seminary support) and congregational finances (such as salaries, operating budgets and building costs).

Giving for benevolences in 2007 hit an all-time low, with an average of just 14 percent of member contributions going to needs beyond the church, down from a high of 21 percent 40 years ago. Ronsvalle said this may indicate churches believe that "maintenance is adequate" and are more concerned with being financially sound than contributing to missions.

Ronsvalle said churches have become complacent -- "lukewarm" is the term the Bible uses -- and are no longer challenging themselves to do extraordinary things. There is a "lack of vision" and churchgoers have a hard time seeing how their contribution to missions can affect the world or its problems.

A few more thoughts:

1. Ok, so Christians are marginally better than non-Christians at giving. But there are what -- something like a bazillion verses on giving in the Bible? Wouldn't you expect someone who reads/believes what the Bible says to give a whole lot more than Mr. and Mrs. Average who may or may not be reading the same sort of stuff on giving? I would hope so.

2. Looks like churches are better at building buildings and paying staff than anything else. Now don't get me wrong, there certainly is a place for this (we need places to worship and people to minister after all.) But if we all gave at the 10% level, there would be a better balance -- something like 2% going to churches and 8% going to help the needy.

3. The reference to "lukewarm" is one that's hard to comprehend in just a few verses because it's from the book of Revelation (tons of symbolism). That said, I wanted to share it with you anyway:

These are the words of the Amen, the faithful and true witness, the ruler of God's creation. I know your deeds, that you are neither cold nor hot. I wish you were either one or the other! So, because you are lukewarm—neither hot nor cold—I am about to spit you out of my mouth. You say, 'I am rich; I have acquired wealth and do not need a thing.' But you do not realize that you are wretched, pitiful, poor, blind and naked. I counsel you to buy from me gold refined in the fire, so you can become rich; and white clothes to wear, so you can cover your shameful nakedness; and salve to put on your eyes, so you can see. Those whom I love I rebuke and discipline. So be earnest, and repent. Revelation 3:14-19

4. Someone's going to say it, so I might as well bring it up. They'll comment something like, "That's why we pay taxes -- to help the poor and needy. That's how we 'give.' " My response is that's a cop-out. I see verses on giving in the Bible, I see verses on helping the poor, and I see verses on paying your taxes, but I don't see anything that says, "Pay your taxes and you don't need to worry about giving or helping the poor."

5. It just seems to me that we're losing lots of opportunities to give to those who are hurting -- especially in this time of economic trouble. It seems like such a shame.

So am I being too harsh here? Or are these criticisms valid?

A Great Money Question

2009-11-14T06:08:00-05:00

Here's a great money question (preceded by a fill-in-the-blank statement) from page 209 of The Secret Language of Money: How to Make Smarter Financial Decisions and Live a Richer Life:

1. My current annual income is $_________________

2. In order to ensure happiness and contentment financially, with no more money problems and worries, my annual income would need to be $_______________

A few thoughts on this:

1. I think it's a great question (or exercise if you prefer -- I guess it's not technically a question) because it's very thought-provoking IMO. If you're not happy with what you make now, what amount will make you happy? Or will making more ever make you happy?

2. Of course, we all know people (and I write about them often) who make more only to spend it all -- and they are no better off (and not happier either.) So is income the real issue here?

3. For me, I'm way past the "happiness" level of income. Sure, I'd prefer earning $10 million a year (I could do this for three months and then retire), but realistically I am completely happy with my level of income.

4. If you're not happy with what you make, what are you doing to close the gap? Maybe you're working on growing your career or perhaps earning some more money on the side?

So, after looking at the above, is there a gap between what you earn and what you'd like to earn? If so, how big is it and what are you doing to close the gap?

How to Become a Billionaire

2009-11-13T12:15:00-05:00

Forbes recently looked at the lives of several ultra-wealthy individuals and came up with this list for how to become a billionaire:

Their parents had a high aptitude for math.
They were born in September.
They were either college drop-outs or went to Yale.
They worked at Goldman Sachs.

All strikes for me -- no wonder I'm not a billionaire. :-)

Forbes admits, of course, that its findings are very non-scientific. Though they are interesting to review, I doubt that they have any correlation with actually becoming a billionaire. In fact, other than "have a brilliant business idea, do it better than anyone else, and stick with it", there's probably not a whole lot of direction one can get for how to become a billionaire.

Becoming a millionaire, however, is something that's relatively easy to achieve. Simply follow the basics.